Coinbase Battles SEC Over Crypto Classifications

Coinbase is embroiled in a fierce legal battle with the US Securities and Exchange Commission (SEC) over the classification of digital assets.

The conflict has drawn the attention of prominent lawmakers, including Senator Cynthia Lummis and House Financial Services Committee Chairman Patrick McHenry.

They have called for the retraction of Staff Accounting Bulletin 121 (SAB 121), a rule they claim unfairly burdens the crypto industry. In a strongly worded letter to SEC Chair Gary Gensler, Lummis, McHenry, and a bipartisan group of lawmakers, she demanded the withdrawal of SAB 121.

They argue that the rule imposes undue burdens on crypto custodians by requiring them to list customer assets as liabilities on their balance sheets.

The letter, signed by 13 senators and 29 House representatives, contends that this accounting rule overstates custodians' legal obligations and exposes consumers to more risk.

"SAB 121 imposes undue burdens on crypto custodians by requiring them to list customer assets as liabilities on their balance sheets," the letter stated.

The lawmakers also noted that SAB 121 was implemented without adequate consultation with relevant regulators and without following the notice and comment procedure expected under the Administrative Procedure Act (APA).

A Government Accountability Office (GAO) review characterized SAB 121 as a formal rule, raising concerns about its implementation as staff guidance.

Lawmakers Rally Against SAB 121

Congressman Ritchie Torres has also voiced strong opposition to SAB 121, accusing the SEC of misusing the rule and criticizing the agency for implementing it in a way that contradicts generally accepted accounting principles (GAAP).

The letter from lawmakers represents sentiments from the House and Senate, which passed similar resolutions disapproving the Staff Accounting Bulletin 121 Bill earlier.

Critics argue that SAB 121 hinders financial innovation and burdens custodians with unnecessary regulations, potentially slowing down the development of cryptocurrencies in the US.

The lawmakers underlined that the SEC could cancel the bulletin and called on Gensler to collaborate with Congress to adopt new measures to regulate the digital assets sector better. They emphasized the need for regulations that do not hinder growth while ensuring consumer protection.

The letter also highlighted other issues with the SEC's use of SAB 121, including accusations that the SEC's Office of Chief Accountant conducted behind-the-scenes meetings with specific industry players, permitting them to ignore the bulletin's balance sheet disclosure provisions.

They argued that this selective process has led to ambiguity and unequal application of SAB 121, eroding its credibility.

Context and Implications

The lawmakers' actions come amid increased focus on the SEC's regulatory stance on cryptocurrencies. Coinbase has been in a legal tussle with the SEC over the classification of digital assets.

The call for the revocation of the Staff Accounting Bulletin 121 Bill comes ahead of US SEC Chair Gary Gensler's testimony before Congress on September 24 and 25. Gensler is expected to face pointed questions from lawmakers about the agency's enforcement actions in the digital asset sector.

The hearings will likely cover not only SAB 121 but broader concerns about the SEC's handling of cryptocurrency regulation.

The ongoing debate highlights the need for more precise digital asset laws. As the crypto industry continues to evolve, the demand for a regulatory framework that fosters innovation while ensuring consumer protection is more crucial than ever.